international finance case roller blade

7/22/2019 International Finance Case Roller Blade

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S O L U T I O N T O C ON T I N U I N G C A S E P R O B L E M : B L A D E S , I N C .

Question 1

Using a spreadsheet, compare the hedging alternatives for the Thai baht with a scenario under

which Blades remains unhedged. Do you think Blades should hedge or remain unhedged? If

Blades should hedge, which hedge is most appropriate?

ANSWER

Based on the analysis, it appears that Blades should hedge its baht exposure. The money market

hedge appears to be the most appropriate for Blades because it results in the highest dollar value

for the net baht inflows. There is only a 20 percent chance that remaining unhedged will result ina higher dollar amount to be received in 90 days.

Calculation of Net Baht Paid or Received in 90 Days:

Baht-denominated inflow:

Pairs sold 45,000

Revenue per pair 4,594

= Number of baht received in 90 days 206,730,000

Baht-denominated outflow:

Pairs manufactured 18,000

Estimated cost per pair 3,000

= Number of baht needed in 90 days 54,000,000

Net inflow (outflow) in baht anticipated in 90 days 152,730,000


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Forward Hedge:

Sell baht 90 days forward:

Baht-denominated revenue 152,730,000

Forward rate of baht 0.0215

= Dollars to be received in 90 days 3,283,695.00

Money Market Hedge:

Borrow baht, convert to $, invest $, use receivables to pay off loan

in 90 days:

Amount in baht borrowed (152,730,000/1.04) 146,855,769.20

Dollars received from converting baht (146,855,769.20

$0.023)

3,377,682.69

Dollars accumulated after 90 days (3,377,682.69 1.021) 3,448,614.03

Remain Unhedged:

Total Dollars Received

Possible Spot Rate in 90 Days ($) from Converting Baht

0.0200 3,054,600

0.0213 3,253,149

0.0217 3,314,241

0.0220 3,360,060

0.0230 3,512,790

0.0235 3,589,155


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Question 2

Using a spreadsheet, compare the hedging alternatives for the British pound receivables with a

scenario under which Blades remains unhedged. Do you think Blades should hedge or remain

unhedged? Which hedge is the most appropriate for Blades?

ANSWER

Based on the analysis, it appears that Blades should hedge its pound exposure. The money

market hedge appears to be the most appropriate for Blades, because it results in the highest

dollar value for the pound inflows. There is no chance that the option hedge will result in a

higher dollar amount to be received in 90 days than the money market hedge, and only a 5

percent chance that remaining unhedged will result in a higher dollar amount than the money

market hedge.

Calculation of Pounds Received in 90 Days:

Pound-denominated inflow:

Pairs sold 50,000

Revenue per pair 80

= Number of pounds received in 90 days 4,000,000

Forward Hedge:

Sell pounds 90 days forward:

Pound-denominated revenue 4,000,000

Forward rate of pound 1.4900

= Dollars to be received in 90 days 5,960,000.00


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Money Market Hedge:

Borrow pounds, convert to $, invest $, use receivables to pay off loan

in 90 days:

Amount in pounds borrowed (4,000,000/1.02) 3,921,568.63

Dollars received from converting pounds (3,921,568.63 $1.50) 5,882,352.94

Dollars accumulated after 90 days (5,882,352.94 1.021) 6,005,882.35

Put Option H edge:

Purchase put option:

Total Dollars Total Dollars

Premium Received per Received from

Possible Spot per Unit Unit (after Converting

Rate in 90 Paid for Exercise accounting for 4,000,000

Days ($) Option ($) Option? the premium) Pounds Probability

$1.45 $0.02 Y $1.45 $5,800,000 5%

1.47 0.02 Y 1.45 5,800,000 20%

1.48 0.02 N 1.46 5,840,000 30%

1.49 0.02 N 1.47 5,880,000 25%

1.50 0.02 N 1.48 5,920,000 15%

1.52 0.02 N 1.50 6,000,000 5%

Remain Unhedged:

Possible Spot Total Dollars


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Rate in 90 Received from

Days ($) Converting Pounds Probability

$1.45 $5,800,000 5%

1.47 5,880,000 20%

1.48 5,920,000 30%

1.49 5,960,000 25%

1.50 6,000,000 15%

1.52 6,080,000 5%

Question no 3

In general, do you think it is easier for Blades to hedge its inflows or its outflows denominated in

foreign currencies? Why?

ANSWER

In general, it is easier for Blades to hedge its inflows denominated in foreign currencies. This is

because Blades outflows are subject to two uncertain variables, the amount of the payablesdenominated in the foreign currency due to fluctuations in market prices and the future exchange

rate. Since Blades has export agreements with its major customers, its dollar inflows are

uncertain only because of exchange rate changes.

Question no 4.

Would any of the hedges you compared in question 2 for the British pounds to be received in 90

days require Blades to overhedge? Given Blades exporting arrangements, do you think it issubject to overhedging with a money market hedge?


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ANSWER

In this case, none of the hedges would require Blades, Inc. to overhedge. Usually, the put option

hedge would require Blades to overhedge, since Ben Holt wishes to hedge the entire exposure

and there are 31,250 pounds in a put option. In this case, however, Blades will receive 4,000,000

pounds in 90 days and will need to purchase 128 put options in order to exactly cover thisexposure.

Given Blades exporting arrangements, it is not subject to overhedging using the money market

hedge. Both the British and Thai retailers have entered into arrangements with Blades under

which prices are fixed. Consequently, it is unlikely that the actual amount received in the future

will differ from the expected amount.

Question no 5.

Could Blades modify the timing of the Thai imports in order to reduce its transaction exposure?

What is the tradeoff of such a modification?

ANSWER

Blades could import sufficient materials to completely offset the baht-denominated inflows thisperiod. Since Blades will generate baht-denominated revenue of 45,000 4,594 =

THB206,730,000 this quarter, it could import materials sufficient to manufacture

206,730,000/3,000 = 68,910 pairs of Speedos in the current quarter. It could then instruct its Thai

customer to make payment directly to the Thai supplier.

The tradeoff of accelerating the purchases from Thailand in order to reduce Blades transaction

exposure this quarter is that the transaction exposure in subsequent quarters will be

correspondingly higher. Furthermore, Blades inventory position will be very high this quarter,and it may incur additional expenses in order to accommodate the higher inventory.


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Question no 6.

Could Blades modify its payment practices for the Thai imports in order to reduce its transaction

exposure? What is the tradeoff of such a modification?

ANSWER

Yes, Blades could modify its payment practices in order to reduce its transaction exposure in

Thailand. Currently, Blades pays the Thai suppliers sixty days earlier than its competitors. If the

Thai baht depreciates over these sixty days, lagging payment would result in a lower dollar cost

for Blades.

The tradeoff resulting from lagging payments to the Thai suppliers is that Blades cannot

use the baht-denominated costs to offset the baht-denominated revenue. This is because baht will

be received and needed at different times. Consequently, Blades may have to hedge its exposure

more often.

Question no 7.

Given Blades exporting agreements, are there any long-term hedging techniques Blades could

benefit from? For this question only, assume that Blades incurs all of its costs in the United

States.

ANSWER

Blades has fixed-price exporting arrangements with both the Thai and British customers for the

next two years. Furthermore, the timing of the resulting foreign currency inflows is known. Since

long-term hedging techniques are particularly appropriate for firms that can accurately estimate

their foreign currency payables or receivables that will occur in the future, Blades could benefit

from long-term hedging techniques. For example, it could enter into long-term forward contracts

for Thai baht and/or British pounds, swap currencies with another firm in the future, or agree to aparallel loan.

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